Fears of a Crisis Grow

Interesting market reactions this morning. While many market participants are clearly being terrorized by a crisis of confidence (and this is always a risk) there look to be some genuinely better pieces of information. Markets are selling off based on rhetoric from the ECB. As we discussed yesterday, the ECB needs to talk big to instill confidence that bond markets in Spain and Italy are not on the cusp of spiraling out of control. Jean-Claude Trichet, the ECB President, mentioned the ability to buy bonds (even today). At first this caused a rally, but the rally in Italian 10-YR yields quickly reversed. Italian 10-YR yields closed the day at a 6.21% yield (up 12 bps) after being below 6.0% at one point in the morning. Despite the gloom, here is why it may make sense to be buying when certain prices and valuations are reached for individual stocks.

1) Expect the ECB to be buying in larger size tomorrow to stabilize bond markets in Europe. They will simply have to now. This is a high probability event.

2) Those shorting the Italian and Spanish bond markets are generally savvy investors who are sitting on profits. They will be realizing risk/reward to being short moves asymmetrically against, as the ECB gets involved.

3) Unemployment claims stayed low, at 400k. This is the first 2-week string of 400k claims (last week was revised to 401k) since the first week of April.

4) July retailer same store sales were generally ok this morning. The US Consumer is still not imploding, in as difficult as the economic environment has been. To be balanced, Gap Stores (GPS), Aeropostale (ARO), and Zumiez (ZUMZ) were disasters. Kohl’s was also disappointing after a very strong result in June. The market is ignoring better than planned results from Macy’s (M), Target (TGT), Abercrombie (ANF), and Costco (COST).

The best investors have a comprehensive investment process which fosters buying confidently in the midst of market panic (because you understand what you own). This is what Crackerjack will be focused on going forward. Now may be a good time to be investing boldly, while other investors are panicked and blindly selling (S&P sits at 1,228 – down 32 points) as we write.